Tuesday, February 9, 2010

It's Not About Financing, It's About Lack of End Demand

A nice find by Calculated Risk blog, on the NIFB Small Business report.  Long time readers of FMMF will be struck by some of the quotes from the group; they could literally have been ripped from the virtual pages of this website 2-3 years ago. [Apr 14, 2008: Stuff I've been Negative on Since Fall 2007]  Written 2 years ago....

The subprime nation (us) is in trouble. Consumers make 70% of GDP. Its a consumption culture where the consumer is being drowned in negative wealth effect from housing, inflation from the Federal Reserve/global forces, and underemployment if not outright unemployment.  It is bad out there in the bottom 60% and it's creeping up to the formerly immune 20-40 percentile as well. So now it "matters" because that starts cutting into the bottom part of CNBC's audience. It is the perfect storm and I will utter the most dangerous words a financial commentator can ever utter - it *IS* different this time. Or at least it's certainly not like it's been in a long time...
People were asking me for individual names for shorts - I continue to stress the same themes I've stated since last summer - anything consumer related or based on American conspicuous consumption - it will all go.

Sorry to sound alarmist but this is the coming reality of a strapped, indebted US consumer whose real wages have been pummeled for years (this has not suddenly happened 18 months ago; it's just now catching up to us without the house ATM to hide the pain), and now is taking it on the chin with the Fed policy to devalue their currency to the tune of 1:5 ratio. Each dollar they now own becomes even more worthless.

We're heading into a long, drawn out recession... I've said it since last summer and as each month/week/quarter passes more denial will turn into acceptance and more earning cuts will have to happen across the board. The people in denial rely on government reports, which are for the most part another pile of fiction work.

Let us be clear, there is a problem in obtaining financing for smaller businesses as banks actually attempt to put some connection between risk and credit back together in the same sentence - I am not disputing that.  But it is not the *MAIN* problem as has been trumpeted in the press and the political class.  Which is why the "solutions" won't work - they are misdiagnosing the problem and using the convenient excuse of "banks won't lend".  The small business is reliant on the domestic consumer by and large.  The top problem is the lack of end customer demand.  Which is what we've been pounding the table on for years.  We've overbuilt everything in the LAST go around of trying to avoid a recession by giving out easy money in any direction.  It is not just housing.  America has 6x the shopping space of any other country.  Do we really need more?  [Sep 20, 2008: US News & World Report - The End of the Shopaholic Nation?] We are at the point we need government to bribel people to buy homes and cars...  there is a pattern here.

There has been too much of everything in this country.  Except for savings.  In a country where the median citizen has been losing ground on wages over the past decade, inflation adjusted.  Hence, end demand stinks - people completely underestimate how the house ATM was driving so much demand the past half decade.  They still understate it.  So is financing *an* issue?  Yes.  But it's not *the* issue.  Customers are.  As we said a few years ago it would be.

p.s. are the NIFB figures showing some bounce off all time low data points?  Yes - as are all economic data in the US.  Pump a few trillion dollars of our grandchildren's money into the economy, and you can make any economic figure bounce - not to mention the stock market.  (there are costs for the benefits we receive now from this generational theft)  But after that bounce off "abyss" levels, what's next?  This is the question the market is whistling past, believing that a credit implosion is no different than a typical recession.  The textbook says "from here private demand will take over from government".  And the textbook is *always right*... until it's not.  Small business says the textbook is not working.

Via Reuters:
  •  The outlook of small business owners remained bleak at the start of the new year, according to a survey released on Tuesday by the National Federation of Independent Business.  "Small business owners entered 2010 the same way they left 2009 -- depressed," the group said, noting its Small Business Optimism Index reading for January was still below the 90 mark, the dividing line between positive and negative outlooks.  The quarterly Index readings have been below 90 for 7 quarters, indicative of the severity and pervasiveness of this recession.
  • In January, small businesses had to cut prices despite tangling with inflation while profits remained weak, according to the survey of the federation's 2,114 members
  • Swelling inventories have largely contributed to the recent growth in U.S. gross domestic product. But small business owners said they continue to liquidate inventories, and with weak sales trends, have little incentive to replenish their stocks.  There are "still more owners planning to reduce stocks than planning new orders," the group found.
So the above shows us the differencee between the big, multinational corporation (who has customers overseas - especially beneficial if exposure to Asia is high) and the typical small business which is going to be facing the domestic consumer.

Now for the killer quote - I believe this one could of been lifted directly out of the blog...
  • "Too many houses were built, too many strip malls opened, too many restaurants started, too many new retail outlets were launched in the 2003-07 period and all of them cannot be supported by a consumer that now chooses to save," the group said. 
  • Last week, President Barack Obama announced new assistance to small businesses, including a lending program through the Small Business Administration.  But the NFIB said the new aid is misdirected, as "only 5 percent of small business owners cite 'financing' as their top business problem but 31 percent cite 'poor sales.'"
  • "Loans are not in short supply," it said, "but reasons to get loans certainly are."
  • "The biggest problem continues to be a shortage of customers."
Let that sink is.  5% say financing is their main issue versus a third who say it's poor end demand. Ignore the dogma ("if only the banks would lend, we'd be fine!")... this is the reality.

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